This leads some to believe that these markets are in a bubble, but we don’t agree. We still recommend buying gold and silver as they will likely remain top performers, rising even further in the years ahead.

Why? There are several fundamental reasons for this. Here’s what’s happening

Inflation growing

Inflation is starting to pick up. It’s set to intensify and this will be an important factor fueling these trends.

Most people think of inflation as rising prices. And while it does push prices higher, it’s not the cause of inflation.

The direct cause is excessive money creation. And the fact is, more money has been created over the past couple of years than at any time in U.S. history. So the cause has already taken place. The effect is just getting started.

We know that commodity prices have been moving up rapidly, especially food and oil prices. As a result, producer prices have been picking up a lot of momentum over the past four months. This month, however, was a real eye opener.

Producer prices soared at an annualized rate of 19% due to the biggest jump in food prices in more than 36 years. Food prices alone surged an unbelievable 47% annualized in their largest rise since 1974.

This is already equivalent to the inflationary 1970s and, unfortunately, no one knows how this will all unfold. The point is, we’re in uncharted territory.

Government spending gone wild

Government spending has created the biggest debt hole ever. In fact, the government is spending so much money, it can no longer rely on foreign lending as a last resort. So the Fed has stepped in to fill the void. It’s been buying massive quantities of U.S. government bonds, essentially funding this unprecedented spending, and creating money out of thin air to do so.

Meanwhile, the latest monthly deficit hit $223 billion, the biggest in recorded history. This comes at a high price, and that’s inflation. Remember, too much money means a weaker dollar. That is, it takes more dollars to buy things, which drives up prices.

This is not anything new. It’s happened over and over in many countries for thousands of years, and it’s happening again.

That’s why gold and silver are rising, and why they’ll continue to move higher. These metals are the ultimate inflation hedge and safe haven in times of uncertainty. It could be geopolitical or monetary uncertainty and we’re now seeing both.

Investors are nervous about the unfolding events in the Middle East. They’re also nervous about the monetary situation. So increasingly, they’re turning to gold and silver.

Demand continues to grow

Another equally important positive is that demand is growing by leaps and bounds, especially in the emerging countries. As hundreds of millions of people worldwide become more affluent, they’re buying gold, as well as other commodities.

International central banks have also become big buyers, further increasing demand. Rather than just holding cash in deteriorating dollars, they’re buying more gold for their reserves. They see what’s happening on the world stage and they obviously don’t like it.

The bottom line is that if inflation keeps picking up, then it will push gold and silver prices higher than most people expect.

What to do?

Protect yourself and buy some gold and silver. But since these markets have already risen strongly over the past couple of years, it would be normal to see some weakness in the months ahead. Your best bet, therefore, would be to average into these markets. Buy a little now, and buy more over the next few months.

You can buy physical gold and silver from a respected coin dealer. If you do, then take delivery and keep your metals stored in a safe place.

Even easier, you can also buy the the exchange-traded funds for gold, such as the SPDR Gold Trust
GLD, -0.33%
and the iShares Silver Trust
SLV, -1.13%
for silver. These move in tandem with gold and silver and they too are good options.

Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter named 2010 Letter of the Yearby MarketWatch’s Peter Brimelow, which provides specific forecasts and recommendations on gold, stocks, interest rates and the other major markets.(www.adenforecast.com)

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